Response April 8, 1994
Request
December 13, 1993
Mr. Joe B. Pacheco
Commissioner
Utah State Tax
Commission
160 East 300 South,
5th Floor
Salt Lake City, Utah
84134
Re: Request for
Advisory Opinion In the Nature of a Declaratory Judgment
Dear Joe:
I represent a
photocopy company that proposes to enter into contracts with large companies to
provide all of the photocopying, printing, and document reproduction needs of
such companies in exchange for certain fees. For ease of reference, I will
refer to the photocopy company as the “vendor”, and the company for which the
copies are made as the “purchaser”. The proposed agreement would operate as
follows:
1. The vendor would provide all of the
copy machines, folding machines, binders and other equipment necessary to
fulfill the contract. All of such machines and equipment would be used only to
provide copies and products for the one single purchaser. Copies would not be
made for any other purchaser using such dedicated copy machines and equipment.
2. The equipment would be kept and used on
the premises of the purchaser.
3. The vendor would also provide all of
the maintenance, repairs, supplies, toner, developer, chemicals, and paper
necessary to fulfill the agreement.
4. The vendor would provide, as its own
employees, a manager, operators, messengers, and all employees necessary to
fulfill the agreement. The employees would be on the premises of the purchaser,
but vendor would be responsible to pay all employee costs, including payroll
taxes, insurance, and benefits.
5. The purchaser would pay to the vendor a
fee based upon the number of copies made. For instance, it might require the
purchaser to pay a minimum monthly fee of $0.04 per copy or $32,000 for the
first 800,000 impressions per month, with an additional charge of $0.025 per
impression for all impressions in excess of 800,000 per month. There would be
additional charges imposed for additional services such as binding, folding,
laminating and stapling. Such additional charges would be on the basis of cents
per copy.
6. The above fee would constitute payment
in full for everything, including the copy machines, paper, toner, chemicals,
supplies, repairs, maintenance, and employee costs and expenses.
7. The purchaser would be required to pay
all state and local sales and use taxes which vendor is required to pay as a
result of the arrangement.
Based upon the above
proposed contract there are several sales and use tax issues that arise.
Therefore, before entering into this type of proposal the parties would like to
know how sales and use taxes would be imposed upon the various aspects of this
proposed agreement. Accordingly, based upon the above represented facts and
proposals, I hereby request that the Tax Commission issue an advisory opinion,
in the nature of a declaratory judgment, relating to the following sales and
use tax issues:
1. Would the amount paid by the purchaser
to the vendor for copies and other printing services be a retail sale of
tangible personal property pursuant to §59-12-103, Utah Code Ann., as
amended, and therefore subject to sales and use taxes?
2. When the vendor purchases the photocopy
machines and other equipment used in the performance of such a contract, are
such purchases exempt from sales and use taxes as property purchased for resale
pursuant to §5912-104(27), Utah Code Ann., as amended?
3. When the vendor purchases the toner,
developer, chemicals, paper and other supplies used to provide the copies to
fulfill the contract, are such purchases exempt from sales and use taxes as
property purchased for resale pursuant to §59-12-104(27), Utah Code Ann.,
as amended?
4. In reference to question number 1
above, if it is your opinion that the total amount paid by the purchaser to the
vendor is subject to sales and use taxes, would the amount subject to tax be
different under the following circumstances. The photocopy machines and
equipment would be leased to the purchaser; the toner, developer, chemicals,
paper and other supplies would be separately sold to the purchaser; and the
balance would be for reimbursement of employee salaries and benefits; but the
contract would be subject to a provision that the total costs would not exceed
$$$$$ per copy or $$$$$ for the first XXXXX impressions per month, and an additional
$$$$$ per impression for all impressions in excess of XXXXX per month? If your
opinion is that the amount of sales and use taxes under such a structuring of
the agreement would be different than if it is structured as originally
proposed, what would be the specific differences, and which specific items
would and would not be subject to sales and use taxes?
5. In reference to question number 2
above, if it is your opinion that the purchase of the photocopy machines and
other equipment would not be exempt from sales and use taxes as property
purchased for resale, would the amount subject to tax be different if the
photocopy machines and other equipment are leased to the purchaser under a
scenario similar to that set forth in question 4 above?
6. In reference to question number 3
above, would your response be different in any way if the contract between the
vendor and the purchaser were structured in the manner set forth in question 4
above?
7. If the proposed contract is structured
slightly differently than as set forth in question 4 above, so that the
photocopy machines and equipment are leased to the purchaser, and the balance
is calculated on a cents per impression basis for all remaining expenses, would
your opinion for any of the above questions 1 through 6 be different, and if
so, how would it be different?
8. In lieu of the any of the above, the
contract may be restructured to allocate the sales price between the lease of the
machines and equipment, the labor, and the paper, toner, chemicals, etc. For
instance, the contract might provide for the price for the first XXXXX
impressions per month to be priced at $$$$$ per copy, allocated as follows:
Lease of machines and
equipment $$$$$
Labor $$$$$
Paper, supplies and
chemicals $$$$$
TOTAL $$$$$
For all copies in
excess of XXXXX impressions per month the charge might be $0.025 per
impression, to be allocated as follows:
Lease of machines and
equipment $$$$$
Labor $$$$$
Paper, supplies and
chemicals $$$$$
TOTAL $$$$$
In the event the
contract is restructured in this manner, how will sales and use tax be imposed
on both the vendor and the purchaser on each portion of the contract?
Please know that I
appreciate your consideration of this matter, and I look forward to receiving
your response in the near future. Best personal regards.
Sincerely yours,
XXXXX
N O T I C E
Notice is hereby given
that you have the right to appeal this decision to the Appeals Division of the
Utah State Tax Commission. A Petition for Hearing must be filed with the
Appeals Division of the Utah State Tax Commission within thirty (30) days from
the date of mailing of the notice of the Commission action from which you are
taking the appeal.
The address of the
Appeals Division is:
Appeals Division
Utah State Tax Commission
160 East Third South
Salt Lake City, UT 84134
The Petition must
contain the following:
1. The name of the Petitioner.
2. Particular tax involved and period of
the alleged liability if appropriate and amount of tax in dispute.
3. If the petition results from a letter
of notice from the Commission, the petition will include date of the letter or
notice and originating department or officer.-
4. A statement of the relief or action
sought.
5. If a particular statute is relied upon
by the Petitioner, reference to that statute.
6. Statement of facts and a summary of
arguments and authorities relied upon.
April 8, 1994
XXXXX
Re: Advisory Opinion - Sales or Use Tax
Application to Full-Service Contracts for Photo copying, Printing, and Document
Reproduction
Dear XXXXX:
This letter is in response
to your recent request (copy attached) for the Tax Commission to issue a
declaratory judgment as to application of sales or use tax to certain
contractual arrangements for full service photocopying, printing, and document
reproduction.
Although your inquiry
was framed as a request for a declaratory judgment, Tax Commission policy is to
initially treat all such inquiries as requests for advisory opinions. As such,
it was referred to the Tax Commission's Auditing Division for their analysis
and recommendations.
The division's
recommendations are as follows:
1.
The total amount paid by the purchaser to the vendor would be subject to
the sales tax as a retail sale of copies, printing services, and other services
such as binding, folding, etc., in connection with the sale of tangible
personal property under Utah Code Ann. 59-12-103 and Administrative Rule
R865-19-80S (copy attached).
2.
Only those items that become an ingredient or component part of the
finished goods sold to the purchaser may be purchased tax-free by the vendor.
Photocopy machines and other equipment used by the vendor to create the items
sold are not property purchased for resale under U.C.A. 59-12-104(27). Such
machines and equipment are considered as for use or consumption by the vendor,
and their acquisitions by the vendor are taxable transactions.
3. As indicated above, those items which
physically become an ingredient of what is sold by the vendor to the purchaser
are considered purchases for resale by the vendor and are consequently exempt
from tax. Toner and paper generally fit the “ingredient” requirement for
exemption. Certainly there are some processes by which developer, chemicals,
and other supplies do not become an ingredient of the copies or printed
material; and consequently, would not qualify for exemption.
4. If the machinery and equipment were
leased to the purchaser, the entire periodic lease payment would generally be
subject to the tax (including the built-in interest factor). See Rule
R865-19-32S attached. If the toner, developer, etc., and other supplies were
sold to the purchaser, the charge to the purchaser would be subject to the tax.
The machinery, equipment and supplies, under these circumstances, could be
purchased tax-free for resale by the vendor. Charges to the purchaser for
reimbursement of employer salaries, benefits, etc., would be considered as
taxable charges in connection with the sale or lease of the tangible personal
property.
Overall, the effect of the described
variation would be the same (total charge to the purchaser, taxable) except
that the circumstances in your question number 4 would also generally result in
payment of tax on the interest factor built into the computation of the
equipment lease payment.
5. As indicated above, if the photocopy
machines and other equipment were leased to the purchaser, the vendor should
purchase these items tax-free and then collect tax on the gross periodic lease
payment. Alternatively, if certain conditions are met, the lease may qualify
for treatment as a "conditional sales lease" under R865-19-32S. The
conditional sale lease treatment will generally result in less tax. See the
referenced rule for additional information.
6. If the toner, developer, paper and
other supplies were sold to the purchaser, they would be purchased tax-free by
the vendor, and the tax must be collected by the vendor on the full sales price
to the purchaser.
7. If the machines and equipment were
leased to the purchaser, the total periodic lease charge would be taxable as noted
above. The balance charged on a “cents per impression” basis would also be
subject to the tax. Purchases of any supplies consumed by the vendor (items
that are not ingredients of the items sold to the purchaser) would be taxable
to the vendor.
8. Even if the structure of the contract
is such that the equipment lease, labor charge, and paper/supplies/chemicals
are separately stated, the total charge to the purchaser is taxable.
Based upon the facts
presented in your letter, we are in agreement with the Auditing Division's
recommendations. Obviously, if there are deviations from these facts, this
opinion may be negated.
If you do not agree
with this determination, you may appeal to the Tax Commission for a formal
hearing. The results of that hearing would constitute a declaratory judgment
and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights
and a copy of the Utah Taxpayer Bill of Rights are attached.
For The Commission,
Alice Shearer
Commissioner